New European Insolvency Regulation

Fundamental Changes and New Regulations

The new European Insolvency Regulation increases the chances for companies to avoid insolvency through restructuring using an autonomous approach. Innovations are available for SMEs as well as for corporations.

In the European judicial system, insolvency proceedings have been coordinated and regulated based on the European Insolvency Regulation since 2002. Once applied, this regulation showed deficits in terms of content, meaning that a revision was necessary.

The objective of the new version, which has been in force since 06/26/2017 is to overcome these shortcomings. It applies to all Member States with the exception of Denmark.

The aim of the European Insolvency Regulation (EIR) is to define the jurisdiction on the applicable law and for opening insolvency proceedings. The EIR will create a kind of universal, procedural structure for instances of international insolvency, in which the processes will be embedded.

A new feature is that the EIR also applies to pre-litigation procedures. This also applies to the procedures for preventing insolvency.

An administrator is no longer absolutely necessary in every case. The procedure is open to the European public, which means that all involved persons and companies in all of Europe can get information about the situation of the company. The EIR offers fundamentally viable companies, which have been embroiled in an economic crisis, a lifeline in the form of a second chance. Instruments used for this purpose are:

Extending the scope of “preventive” procedures and procedures in self-administration

An improvement of the procedural framework for judicial review

Introducing an online insolvency register and linking

Restructuring secondary procedures

Introducing rules on corporate insolvency

The new regulation also prevents something known as forum shopping. This term describes the strategic selection of the indicter or applicant between several possible jurisdictions with the intention of obtaining procedural or material advantages. Thus, in the past, a company was relocated shortly before an insolvency application was filed, and as a result another court was responsible for handling the insolvency. This sometimes happens due to dishonest motives (keyword: corporate undertaker), and sometimes the reasons also had a credible and reasonable background. “Forum shopping” will now be prevented, by holding the EU country in which the company has its Center of Main Interest (COMI) responsible. This Center of Main Interests is presumed to be where the HQ of the company is located. This assumption is further strengthened. If a company has moved its COMI to another EU member state within three months before its application for insolvency, it will be presumed that the former location is the main location for jurisdiction.

One of the main advantages of the new Insolvency Regulation is that it is easier to restore a company before it becomes insolvent.

Conclusion

Until now it was difficult to follow international insolvency proceedings. If, for example, a german subsidiary of a spanish company whose main proceedings were taking place in Spain, the procedure was often limited territorially to the Member State in which the company branch was located. The reason was often that insolvency proceedings were initiated by local creditors. One of the objectives of the EIR is now to prevent further conflicts from arising. To date, some regional parts had to be liquidated, despite the fact that they might have been viable. That was an obstacle to effective remediation. This limitation is rendered obsolete by the new regulation. Moreover, the new EIR also allows group insolvency proceedings to be coordinated, since the regulation tries to define the cooperation between the various administrators and courts. On the other hand, the introduction allows a procedure known as “group coordination” to take place according to the German model. The group coordinator is responsible for structuring the process for the whole group and strategically guiding it. This has significant advantages for creditors.